How Removing Copy-protection Increased Record Companies’ Music Sales

When digital music became available online, through various file-sharing websites, the music industry witnessed a substantial decrease in sales. The big recording companies – EMI, Sony, Universal and Warner – blamed the decline on piracy and intellectual property rights infringements. They responded by suing thousands of individuals who had shared digital music, resulting in several landmark court cases. The industry also responded by adopting technology – digital rights management (DRM) technology – which was embedded in music files purchased on-line, that made copying all but impossible. However, in April 2007, EMI unexpectedly removed such DRM technology from its music files, which then enabled individuals to share the music files they had purchased with others.

The question

EMI’s move came as a surprise; so much, that many thought it was an April fool’s joke. This would obviously harm their sales, wouldn’t it? Individuals could not only share the music files they purchased with friends and family, but technically they could potentially also upload them on sharing sites. Surely, enabling this form of piracy would depress EMI’s sales? Yet, 2 years later, the other three record companies followed suit.

The question how it affected record companies’ sales is pretty much impossible to answer by just looking at the numbers, because there is no way of telling how sales would have developed had the record companies not removed DRM technology. Then, however, a clever PhD student from the University of Toronto – Laurina Zhang – spotted a golden opportunity to do some truly illuminating research. The fact that EMI removed DRM some time before the other three record companies, created what researchers excitedly call “a natural experiment”. She realised that by exploiting the time difference between these events and running a so-called difference-in-differences statistical model, she would be able to draw firm conclusions about how lifting DRM had affected sales. Eagerly, she got to work.

The answer

She painstakingly collected data on 5,864 albums released by 634 artists before 2007 – the date EMI dropped the DRM technology – and traced both their on-line and physical sales. She then put all this in a statistical model and calculated whether EMI’s album sales went up or down as a result of removing DRM technology from all its records (in contrast to the other record companies, which had not yet removed DRM). And the answer was unambiguous and clear: EMI’s sales went up.

In fact, EMI’s sales went up by no less than 10 percent. But why was that? How on earth could lifting the copy-restrictions actually stimulate sales?! To answer this question, Laurina (again) did something clever. She measured how the lifting of DRM influenced the sales of different types of albums: ranging from best-selling albums (more than a million sold) to relatively tiny niche records (less than 25,000 copies sold) and the results suggested a compelling story.

Removing the DRM restrictions enabled search and sharing among consumers, which caused many people to be exposed to music they otherwise would never have heard of. This left the sales of top-selling albums unaffected (people would hear those for instance on the radio anyway), but significantly stimulated the sales of lower-selling albums, by no less than 30 percent. Enabling sharing made people discover new fringe artists or rediscover old ones, and subsequently they went on to buy (other) albums of those artists on-line, through iTunes or Amazon. Consequently, EMI benefited significantly from lifting the DRM restrictions.

Take-aways

To me Laurina’s research offers a fascinating turn in our understanding of intellectual property rights (IP) and how they sometimes might have unexpected consequences. More specifically, with on-going digitisation in various industries – including games, books and television – it might make producers and rights-holders take notice and think twice.

But it also tells a wider story of sharing and search. It shows that for firms offering specialty products in their portfolios, enabling search and giving consumers access to sample products becomes key. Tapping into people’s network and desire to share with others could be a valuable opportunity to exploit for this purpose, rather than one to fight and restrict. Managers are often inclined to fiercely protect what they see as their competitive advantage and shield it from imitation and dispersion. However, sometimes it might be worth opening up, and reap the benefits in turn.

Yet, what I – as an academic – also much value in Laurina’s work is that it shows the sheer purpose (if not necessity) of academic research, to understand the world around us. Sometimes things – especially in the long-run – are different than meets the eye. What seems obvious at first (“of course removing copy protection is going to hamper sales!”) can be shown to work very differently when examined in a thorough and systematic way by someone who knows what she is doing (“in fact, if you dig a bit deeper, removing copy protection appears to increase sales”). And understanding the world around us clearly is a necessary first step for us to be able to improve it.

I wonder whether there are any analogies here with capital markets and promoting information on smaller companies? Could it be made easier for individuals to share information on such companies in a way that would lead to more activity in their shares?

A really interesting experiment & results. Also interested in similar findings for the likes of Spotify. Although not really related to IP, it is another method of listening to music for free that exposes more material to more people and could potentially drive more revenue. Especially for older artists whereby classic hits are being replayed and playlisted… the ‘junk’ (one-hit-wonders) will fall to the bottom while the quality will shine through and hopefully profit in the long term.

This blog is written by London Business School’s Professors of Strategy and Entrepreneurship

In my work, I study the limitations of organizations. Often, management practices and strategies have unexpected consequences. I try to uncover these hidden and unintended long-term consequences through rigorous research. This brings me to study topics[…]

Over the years, I have published widely on such issues as headquarters-subsidiary relationships, corporate entrepreneurship, knowledge management, global customer management, post-acquisition integration processes, corporate ambidexterity and management[…]

I study and teach entrepreneurship and technology strategy, with a specific interest in venture capital. For instance, in my past work, I have examined how entrepreneurs raise venture capital and examined general shifts in the venture finance landscape.[…]

I am Professor of Strategy and hold the Robert P Bauman Chair in Strategic Leadership. My work focuses on strategy and general management. I have done research and published on the topics of strategic innovation, business-model innovation, diversification[…]

I have published on topics such as stakeholder theory, corporate social responsibility, and the boundaries of the firm. My work also focuses on issues of managerial cognition, including linguistics, and I’m currently exploring the patterns between managers’[…]

My research focuses on the economics of entrepreneurship and innovation. I research, teach and consult on the topic of corporate venture capital, focusing on the conditions under which established corporations succeed in partnering with innovative startups,[…]

In my work on corporate social responsibility (CSR), I examine how environmental, social and corporate governance strategies are adopted, embedded and successfully implemented by organizations globally. In this light, I study the role of institutions,[…]

I research questions at the intersection of innovation, competition and organization. I have a particular interest in understanding how large groups or “ecosystems” of innovating firms and individuals should be deliberately organized and governed.[…]

At the School, I hold the Sir Donald Gordon Chair of Entrepreneurship and Innovation. My research looks at how industries, business models, and organizational boundaries change over time: the new strategic dynamics of changing "industry architectures".[…]

I work in the field of the economics of innovation and entrepreneurship. I am specifically interested in the creation of economic value through public and private investment in science. My research explores the development of new scientific knowledge[…]